Adoption%20of%20IFRS%20in%20Latvia

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Initial transfer to IAS

• Transfer to International Accounting Standards
  (IAS) was implemented in Latvian banking sector
  in mid 90-s
• Implementation was achieved through reference to
  IAS in the Law on Credit Institutions
• No translation of IAS into local language was
  provided, however, trainings in local language
  were provided to banks on application of IAS

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Initial transfer to IAS

• At initial implementation period the main focus
  was
• proper establishment of accruals
• valuation of bonds and derivatives
• establishing allowances for loans and advances

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Subsequent changes to IAS

• Implementation of subsequent changes to IAS was
  mainly the duty of banks themselves
• Despite the fact that the central bank provided
  local regulations on preparation of annual
  accounts which were based no IAS requirements,
  the regulations were not as extensive, and
  sometimes were not up-to-date

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Implementation of IAS 39 (2001)

• Lack of knowledge and expertise across whole
  banking sector on practical implementation of the
  new standard
• Lack of adequate translation in local language
• Main focus placed on four categories of financial
  instruments and transfers between portfolios
• Few years passed before issues like application
  of effective interest rate on loans, assessment
  of financial assets impairment, embedded
  derivatives were properly addressed
• Auditors were the most active in promoting change

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Implementation of IAS 39 (2001)

• Hedge accounting rarely implemented due to strict
  documentation requirements
• The banking regulator and supervisor, which were
  separated from the central bank in 2000, did not
  take active role in implementation of changes in
  IAS
• Local regulations on preparation of annual
  accounts for banks, which should be based on IAS,
  were amended one year later and became in force
  as of 1 January 2002
• However, amended local regulations were not fully
  in line with regard to assessing impairment losses

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Implementation of IAS 39 (2001)

• Information systems of banks were generally not
  adjusted for IAS 39 requirements, therefore a
  number of calculations were done manually at
  year-end
• Only in 2006 some banks have adjusted their IT
  systems to calculate properly effective interest
  rate on loans. However, most of the banks will
  continue to assess the required adjustment
  manually

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Implementation of IFRS (2005)

• In general, lack of information on changes as
  such.
• Again, auditors are largely the main driving
  force for promoting the change
• Subsequently, the regulator decided to reduce the
  scope of local accounting and reporting
  regulations and provide more direct references to
  IFRS. This change will take place in 2006.
• Lack of enforcement since fully dependent on the
  auditors of banks
• Significant loan impairment losses have been
  reverse as a result of IAS 39 requirement for
  loss event

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Loan impairment losses

• Loss event (triggering event) largely is linked
  to loan payment delays which is a basis for
  establishing loan impairment losses (loan
  provisions) under prudential reporting rules.
• Additional events like change in financial
  position of borrower is reliable for large
  companies. In medium and small companies
  financial reporting is not sufficiently reliable.
• Sometimes the bank has its own assessment of the
  companies financial position as poor, however,
  such information is not reflected in the
  financial reporting of the borrower. Accordingly,
  this might not be viewed as objective evidence
  for loss event.

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Loan impairment losses

• Future cash flows are largely determined by
  reference to collateral and historical
  information on recovered payments for similar
  problematic loans.
• Individual assessment of future cash flows are
  not used in practice since it takes significant
  resources for preparation of such calculations
  and often there is not sufficiently reliable
  information on which such cash flows can be
  based.
• The issue on differences between prudential
  reporting and annual financial reports remains
  unresolved. The regulator still requires banks to
  assess loan impairment losses based on its own
  regulations which are not in line with IAS 39,
  however, IAS 39 rules can be applied when
  preparing annual financial reports.

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Remaining problem areas

• Lack of unified enforcement. Different approaches
  taken by different audit firms, e.g. there could
  be different approach on loss events used for
  determining loan impairment losses.
• Lack of proper IT support for calculation of
  effective interest on loans and assessing loan
  impairment based on expected future cash flows.
• Lack of market information and developed
  techniques to assess fair value of loans for
  disclosure purposes.
• Lack of historical information for better
  assessment of loan impairment losses